An annuity is a type of insurance service. In general terms, in an annuity contract, an insurance company and an annuitant contract for the annuitant to make one or more payments to the insurance company. For that consideration, the insurance company makes periodic payments to an annuitant. By way of example, the insurance company may be obliged to make a payment of a predetermined amount to the annuitant annually for a predetermined time period. In another example, the insurance company is obliged to make payments of a predetermined amount to the annuitant annually for the life of the annuitant.
Annuities may be immediate annuities, in which the stream of payments begins immediately upon purchase of the annuity contract. Annuities may also have a deferral period, in which the stream of payments only begins after expiration of the deferral period. The asset value of an annuity upon the commencement of a stream of payments generally is a significant factor in determining the amount of the payments. During the deferral period, the insurance company may credit the account with interest. An account bearing a fixed rate of interest provides predictable gains. However, over almost all periods of more than a few years since 1945, stock market indices at least in the United States have generally provided better investment returns than fixed-interest assets.
In a fixed index annuity, the asset value of an annuity account is calculated based on factors including principally changes in the value of an index calculated according to a formula made up of weighted values of selected stocks. Numerous such stock indices are available. Each index has a numerical value calculated according to a formula; in general terms, the formula for the value of the index as of a certain time and date includes as factors the prices of certain stocks at the certain time and date, weighting the prices, and summing the weighted prices. A change in an asset value of a fixed index annuity account between two dates may be based on a formula in which a percentage change in the numerical value of the index between the two dates is a factor.